Chapter 1 Introduction to Cost Accounting Cost Accounting Foundations and Evolutions Kinney and Raiborn Seventh Edition COPYRIGHT © 2009 South-Western, a part of Cengage Learning. South-Western is a trademark used herein under license.

Learning Objectives (1 of 3) What are the relationships among financial, management, and cost accounting? What are the the sources of authoritative pronouncements for the practice of cost accounting? What are the sources of ethical standards for cost accounting?

Learning Objectives (2 of 3) What is a mission statement and why is it important to organizational strategy? What must accountants understand about an organization’s structure and business environment in order to perform effectively in that organization?

Learning Objectives (3 of 3) What is a value chain, and what are the major value chain functions? How is a balanced scorecard used to implement an organization’s strategy? Why is ethics so important in an organization?

Accountants Financial accountants provide information to external parties - investors, creditors, regulators Managerial accountants provide information to internal users - managers Cost accountants provide information to both internal and external users – product cost information

Accounting Differences Financial External focus Whole organization Historical Quantitative Monetary Verifiable GAAP Formal recordkeeping Managerial Internal focus Segments or divisions Current/projected Quantitative/qualitative Monetary and nonmonetary Timely/reasonable estimate Benefits exceed costs Formal and informal recordkeeping

Relationship of Financial, Management, and Cost Accounting FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING COST ACCOUNTING Product Costs

Product Cost Information External parties - stockholders, creditors, regulators –For investment and credit decisions –Complies with GAAP –Enterprise focus Internal parties –Planning, controlling, decision making –Evaluating performance –Includes upstream and downstream costs –Disaggregated

Accounting Bodies Financial Public Company Accounting Oversight Board (PCAOB) Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) Management Institute of Management Accountants (IMA) Society of Management Accountants of Canada Cost Accounting Standards Board (CASB)

Management Accounting Organizations IMA Statements on Management Accounting (not legally binding) Society of Management Accountants of Canada Management Accounting Guidelines (not legally binding) Cost Accounting Standards Board (CASB) Government contracting standards (legally binding)

Professional Ethics Earnings management--deliberate accounting adjustments to “hit” profit targets Often adjustments involve cost accounting—product costs and inventory valuations Stretching legitimate accounting techniques Outright fraud

Ethics and Legislation Sarbanes-Oxley Act – CEOs and CFOs personally accountable for the accuracy of their organization’s financial reporting False Claims Act – whistle-blower protection and penalties for failure to blow the whistle (disclose known financial frauds)

Ethics & Management Accountants Standards of Ethical Conduct for Management Accountants –Competence –Confidentiality –Integrity –Objectivity

Organizational Strategy 1.Develop Mission Statement 2.Implement strategy 3.Deploy resources to create value for customers and shareholders 4.Recognize that each organization is unique—thus unique strategies must be developed

Organizational Strategy Five factors core competencies organizational structure management style and organizational culture organizational constraints environmental constraints

Organizational Strategies Core competency – critical function or activity providing a competitive advantage Cost leadership strategy - undercut competitor prices Product differentiation strategy - superior quality products or unique services sold at a premium

Organizational Structure Distribution of authority and responsibility in an organization –Authority – right to use resources to accomplish a task or achieve an objective –Responsibility – obligation to accomplish a task or achieve an objective

Value Chain Set of value-adding functions and processes that convert inputs into products/services –Research and Development –Product Design –Supply –Production –Marketing –Distribution –Customer Service Communicate strategy to all members of the value chain

Balanced Scorecard Financial Customer Value Internal Business Learning and Growth

Balanced Scorecard Learning and Growth Internal Business –Things to do well to meet customer needs and expectations Customer Value –How well the organization is doing relative to important customer criteria Financial –Address stockholders/stakeholders concerns about profitability and organizational growth

Ethics in Multinationals Foreign Corrupt Practices Act – prohibits bribes to obtain/retain business Organization of Economic Cooperation and Development Convention – crime to offer, promise, give bribes to obtain/retain internal business deals

Questions What is the relationship among financial, management, and cost accounting? How is the balanced scorecard used to implement an organization’s strategy? Where can an accountant find ethical standards for cost accountants?

Potential Ethical Issues Earnings management Low cost production at any cost Whistleblower retaliation Fixing prices Bribery and other corruption Hiding managerial acts